Euro zone bond yields slide after ECB cuts rates and flags tariff risks

By Harry Robertson and Stefano Rebaudo

April 17 (Reuters) - Euro zone bond yields fell sharply on Thursday as investors priced in more rate cuts from the European Central Bank, after it lowered borrowing costs and said U.S. President Donald Trump's tariffs would knock the euro zone economy.

Germany's two-year bond yield DE2YT=RR, which is sensitive to ECB rate expectations, dropped to 1.671% from around 1.81% just before the decision. It was last trading down 8 basis points (bps) at around its lowest since late 2022.

The ECB cut rates by 25 bps to 2.25%, its seventh reduction in a year as inflationary pressures dwindle and Trump's tariffs threaten to damage an already fragile euro zone economy.

"The major escalation in global trade tensions and associated uncertainties will likely lower euro area growth by dampening exports," ECB President Christine Lagarde told a press conference.

She also said the recent strengthening of the euro, as the dollar has dropped, could push down inflation by cheapening imports.

Germany's 10-year bond yield DE10YT=RR, the benchmark for the euro zone bloc, was last down 4 bps at 2.459%, having traded 3 bps higher before the decision.

Money markets were last pricing in an ECB main rate of roughly 1.57% by the end of the year, down sharply from 1.71% before the announcement.

"Overall, this was clearly a dovish meeting," said Max Stainton, senior global macro strategist at Fidelity International.

"The (ECB) General Council's statement and President Lagarde’s comments in the press conference clearly show(ed) an awareness that growth and inflation risks are both moving to the downside."

Bond markets have been volatile since Trump announced sweeping tariffs on April 2, even after he rolled most of them back, as investors struggle to gauge where his policies are headed.

Trump said there was "big progress" in preliminary talks with a Japanese trade delegation in Washington about the barrage of tariffs he has imposed.

Investors have favoured German bunds as a safe-haven asset, helping yields fall to their lowest since chancellor-in-waiting Friedrich Merz announced a dramatic boost in government spending in early March.

Italy's 10-year yield IT10YT=RR was last down 5 bps at 3.639% - around its lowest since early March.

The closely watched gap between Italian and German yields DE10IT10=RR stood at 118 bps. Last week, credit rating agency S&P upgraded Italy's long-term ratings to "BBB+" from "BBB".